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Cap

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Cap
A contract whereby the seller agrees to pay to the purchaser, in return for an upfront Premium or a series of annuity payments, the difference between a reference rate and an agreed strike rate when the reference exceeds the strike. Commonly, the reference rate is three- or six-month Libor. A cap is therefore a Strip of Interest rate guarantees that allows the purchaser to take advantage of a reduction in Interest rates and to be protected if they rise. They are priced as the sum of the cost of the individual options, known as caplets.

See also Collar
Posted by  Privatebanking.com
 
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